February 10th, 2006
Let’s get this straight: Network Neutrality assures that no online service adds value to anybody’s network. It was surprising to see Fred’s post this morning on Network Neutrality. Fred is one of my blogging icons, but to say that Google adds value to the carrier’s network is just plain wrong. Fred says:
Google is a value added service that runs on the carrier’s networks. It ADDS VALUE to their networks. Without it, the carriers would have a LESS VALUABLE service. And yet they want Google to pay them for improving their service. This is nuts.
Not nuts. Google does not improve their service. It improves everybody’s service. And that’s the problem the telco is facing.
While strictly speaking, Fred may be right, he is dead wrong to use a common commercial idea like "value added services" as an analogy. Gasoline adds value to cars, yet no one car manufacturer receives any competitive advantage because their cars run on gasoline.
Commercially interesting value-added services provide both differentiation and competitive advantage. Usually, both parties benefit. For example, luxury car manufacturers used to bundle Blaupunkt stereo equipment in cars to attact customers. Both parties win. If all cars came with Blaupunkt equipment, only Blaupunkt wins. You could say that a ubiquitous Blaupunkt system in all cars of all types "adds value", but only for consumers. Clearly it gives no one manufacturer any advantage and thus does not allow the manufacturer to charge more, or to attract more customers by using Blaupunkt as a hook.
Similarly, Google, Skype and BitTorrent, cited by Fred, give carriers neither differentiation, nor competitive advantage. The only advantage it gives them is exactly the same as all of their competitors: it increases demand for the services in the market as a whole.
Why should any company be interested in extensive investment in new networks to further the interests of their competitors? Improving bandwidth requires money, and the market is dictating very competitive prices. It’s a low margin business and it’s almost impossible to differentiate your 12mb DSL services from anybody else’s 12mb DSL service. You offer it, they offer it, we all charge the same amount. Google wins, but the telcos don’t. Just as Blaupunkt would win and the car manufacturers wouldn’t if Blaupunkt stereos were ubiquitous in all cars.
It’s even worse. The telcos are in a no-win situation. If they limit access to Skype in preference for their own (inferior) service, they lose because they are adding value to their competitors internet access service where Skype is available. If they allow Skype, they lose because their service is inferior and the superior service is one they have no ability to profit from. They can’t charge their customers more for Skype if their competitors don’t. Plus, they can’t share in the revenue stream.
I don’t like the telcos any more than Fred does, but I try not let my dislike of them cloud the issues. I think they’re merely doing business and getting more and more desparate.
I think that their position in the internet value chain, as the access provider, is economically dysfunctional. Sure, maybe they asked for it. Maybe they even orchestrated it! Maybe they act counter-productively. Surely their regulatory advantages and monopolistic tendencies are not helping.
Unfortunately everybody loses if the economics of the internet are stifled, and that is exactly what happens one the most critical component of the value chain is dysfunctional. And the dysfunction is systemic. Even new entrants in the "last mile" game will suffer unless they find a way to differentate their services.
Myths like "Google adds value to Verizon’s network" as some sort of "telco greed battle cry" just don’t cut the mustard. There needs to be a clearer economic benefit to telcos for "offering Google" than "they must or they shall die!"
There needs to be recognition that differentiation and competitive advantage are meaningful business concepts, even for telcos. Is the answer "charging Google for access"? No, I’m sure it’s not. But the answer will only be determined when real issues, not myths, are driving our conclusions.
[tags: network neutrality]
February 8th, 2006
Network neutrality is a pointless, emotionally-charged distraction from
the real issues involved in monetizing Internet content. The Internet is
rapidly becoming a retail and marketing vehicle, just as shopping malls
and other retail chains. A sound distribution channel, with economic
benefits and motiviations must be built which satisifes both the needs of
telcos as well as those of content creators. This adversarial
relationship between the storefronts and the product makers will kill us.
Today’s article by Daniel Berninger, Net Neutrality Not An Optional Feature of
Internet is a fine example of the kind of emotional posturing that’s
leading us down a very dark path.
He super-charges his discussion with analogs about "arms dealers" and
talks of telcos wanting "kickbacks" from content producers.
Berninger talks of "tolls" when we need to be talking about "margins".
He talks of telcos trying to "protect their existing voice and video
revenue streams from Internet enabled innovations" when he should be
asking how everyone can participate in revenue-generating innovations.
While discourse like Berninger’s may spur many content producers to
demonize telcos and strengthen the resolve to combat these
"extortionists", it is full of vacuous reasoning.
He is specifically
choosing controversial examples, such theorizing what it would be like if
"Intel charged a fee to enhance software performance". Some participants
in revenue chains are inappropriate, while other channel-model schemes
work very well. Choosing the Intel analogy does little to convince me that ISPs are not reasonable participants in the chain of value delivered
to consumers. I think my Walmart analogy below is far more productive.
Mistakes in Perspective
One enormous mistake is focusing too strongly on the assumption that
telcos are hugely profitable companies who are looking to "extort" money
from content vendors. The implication is that their motives must clearly be greed and exploitation of their unreasonable locus of control.
It is much more important to look at the profitability of
the internet service fraction of telco business to make reasonable
assessments about the economic viability of Internet business models.
Telcos are too highly subsidised, regulated, and pursue a vast array of
revenue schemes. We are just looking at internet access, and the
specific cost-center figures don’t look so rosy.
While I agree that telcos are worthy of criticism and even do some
reprehensible things, it is much more productive to look at them as
businesses with typical economic motivations. It is better to ask
whether their participation in the value-chain wouldn’t make the internet
a better place for retail, not worse. Why can bookstores take a portion
of book revenue without falling prey to such attacks? Why not ISPs?
Read some of the research about telecom issues such as that provided by
The Yankee Group. The focus is on increasing
investment in infrastructure, figuring out ways to monetize the digital
supply chain, and how to implement technologies to make it feasible.
These are mature businesses driven to solutions by problematic supply-
and-demand relationships in Internet commerce.
My Walmart Analogy
A few days ago, I read Just Say No(thing) on Om Malik’s blog. Ed Whitacre of
SBC/AT&T was making noises about charging content providers.
I urged people to consider the following analogy:
Whitacre’s comments reflect commercial realities of product distribution.
So, yes, he sounds confused a bit, and the the idea that content producer
should start paying is not only offensive to the idea of open networks,
but seems ridiculous from an economic point of view.
Or is it??
Let’s think more generally of what SBC/AT&T provides. They provide their
customers access to products and services. Their customers pay them for
access to the products and services.
Just like Walmart.
Imagine that Walmart allowed anybody to put products in their stores, and
did not mark-up the goods, but instead charged customers to enter the
store and allowed anybody to walk out with whatever they wanted. They
then left it up to the customer to figure out how to get in touch with
the toaster manufacturer to pay for their new toaster. This is the
business model of the Internet.
The more you think about typical retail value chains, the more and more
curious my analogy becomes.
Of course Whitacre wants money from the content providers. Just as
Walmart wants margin on the products they sell. The whole reason value
chains exist is so that everybody along the chain participates in the
revenue.
What to do?
First, we need to look at the overall distribution model more
wholistically and consider that the access provider may be a
reasonable ally instead of an adversary. If the access provider makes a
distribution margin, they’ll be motiviated to make access to the wider
range of services more affordable. The better it works, the cheaper
access becomes, and I can even imagine truly free internet access
paid for purely by discount margins on goods sold over the wire.
Second, build open standards that make it possible for telcos to
link their access service payment systems to anybody’s content
services. An open standard could make it possible for someone such as
Amazon to offer a set of payment methods: Mastercard, Visa, On Your
Monthly ISP Bill. Anyone could use it, and it solves myriads of
payment problems. Go back and start re-reading the literature on
micropayments from Web 1.0. It wasn’t all bad, there were just too many
barriers and not enough vision.
Third, telcos must stop engaging in the negative "walled garden"
thinking, and begin promoting an integrated retail distribution model
where everybody benefits as revenue flows. Resist closed thinking
about particular telcos and embrace technologies and services which
support this model.
In short…
Content providers and technologists better figure out how to satisfy
people like Whitacre with business and revenue value chains that are more
like retailing. That’s what the internet is. Content providers produce
products, they ship them to an ISP, and ISP delivers them to the
customer.
Where’s the margin?
Unless the value chain works, content providers should, rightly, feel
very afraid. Any retailer like Whitacre will try to pick the most
profitable products to sell. If they’re not getting good margin from one
content provider, they’ll try to drop that “product line” in favor of
another.
Berninger talks of an "end to innovation" because of the loss of network
neutrality. Instead, a constructive economic channel model for Internet
distribution represents the beginning of innovation.
[tags: network neutrality]
